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NOTE ON PERQUISITE TAXABILITY FOR CONCESSION IN SCHOOL FEES OR SCHOLARSHIP GIVEN BY THE EMPLOYER TO THE CHILD OF EMPLOYEE:

1. Taxability of Perquisites:

As per section 17(2) (iv), Perquisite includes, “any sum paid by the employer in respect of any obligation which, but for such payment, would have been payable by the assessee”;

Sub-Rule (5) of Rule 3 of Income-tax Rules, 1962 Provides as under:

The value of benefit to the employee resulting from the provision of free or concessional educational facilities for any member of his household shall be determined as under:

(i) The sum equal to the amount of expenditure incurred by the employer in that behalf, or

(ii) where the educational institution is itself maintained and owned by the employer or where free educational facilities for such member of employees' household are allowed in any other educational institution by reason of his being in employment of that employer, the value of the perquisite to the employee shall be determined with reference to the cost of such education in a similar institution in or near the locality.

Where any amount is paid or recovered from the employee on that account, the value of benefit shall be reduced by the amount so paid or recovered:

Provided that where the educational institution itself is maintained and owned by the employer and free educational facilities are provided to the children of the employee or where such free educational facilities are provided in any institution by reason of his being in employment of that employer, nothing contained in this sub-rule shall apply if the cost of such education or the value of such benefit per child does not exceed one thousand rupees per month.

Accordingly, in view of the above, the value of perquisite in case of employees can be calculated as under:

Example 1:

X is a teacher in school and X’s son is a student in this school.  School charges fees of Rs.6 lakhs p.a. in normal course. However, in case of X, school is charging fees of Rs.3.5 lakhs only.

Valuation of Perquisites:

Particulars

For X’s Children

For other members of X’s household

(A)

Fees of such education in a similar institution in or near the locality

6,00,000

6,00,000

(B)

Fees charged from the employee

3,50,000

3,50,000

(C)

No. of children (1)*1000*12

12,000

Nil*

(D)

Taxable Value of Perquisite in the hands of employee (A)-(B)-(C)

2,38,000

2,50,000

*Deduction of Rs. 1000 p.m. for each child (for maximum two children) allowed. However, the same is not allowed in case of other member of household.

2.  Tax planning:

Option 1:

Charge full school fees (without any discount) from the teachers (parents of the student) and pay salary to them as increased by the discount which would have been given on their children’s school fees, had the option of discount in school fees opted.

Impact of the above option:

As the perquisite, fully taxable in the hands of the employee, the increase in salary will provide them to have such a salary structure, which would be comprised of House Rent Allowances (which is always based on the basic salary), Reimbursements etc. It can reduce their taxable income by 15 to 20%. 

Option 2:

Scholarship:

Amount of scholarship given by the employer-company to children of its employee solely at its discretion without reference to terms of employment is exempted u/s. 10(16) of the Act and accordingly, not assessable as perquisite in the hands of employee.

Thus, in view of the above, Perquisite is always taxable in hands of the employee subject to limited exemption in certain cases. However, the above tax planning can reduce the tax liability significantly of the assessee.

3. Judicial Analysis: whether Scholarship fees is allowed as exemption u/s. 10(16) or it is a perquisite in the hands of the assessee:

3.1  Commissioner of Income Tax vs. M.N. Nadkarni (1986) 161 ITR 544 (BOM):

In this case, the Hon’ble Mumbai HC held as under:

“If these amounts were not to be treated as perquisites given to the assessee, the question of including them in the income of the assessee would not arise at all, and if the said amounts are to be included in the income of the assessee on the ground that they are perquisites, as suggested by the Revenue, one fails to see how it would be open to the Revenue in the same breath to contend that the said amounts were not paid to the assessee. If the amounts are taken as having been paid to the assessee, they were amounts of scholarship, which is not disputed and hence they are not liable to be included in the computation of the total income of the assessee under the provisions of s. 10(16).

Coming to the provisions of s. 17(2)(iii)(c) it appears that it is not possible to take the view that in this case the scholarships paid to the children of the assessee could be looked upon as perquisites given to the assessee. As pointed out by the Tribunal, there is nothing in the terms of employment of the assessee which confers any right upon or gives rise to an expectation on the part of the assessee that any scholarship shall be paid by the employer-company to his children. The scholarship scheme makes it clear that the grant of scholarship is for the children of the managing staff which would show that the payment was not intended to be made to any member of the managing staff but to their children directly or for the benefit of the children of managing staff. Analysis of this scheme clearly shows that there was no right created in favour of any employee against the company for any scholarship being paid to his children. The scholarship was paid entirely gratuitously by the company and in its sole discretion. Payment of the scholarship amount was never received by the employee but by the children concerned or deposited in the special account referred to in the scheme. In these circumstances, one fails to see how it can be said that the scholarship amounted to a perquisite received by the assessee as contemplated under s. 17(2)(iii)(c).”

Conclusion

Scholarship amount given by the employer to the two children of the assessee-employee is not a benefit in terms of s. 17(2)(iii).

3.2 Commissioner of Income Tax vs. B.L. Garg (2007) 289 ITR 218 (All):

In this case, the Hon’ble Allahabad HC held as under:

“Even if, for the sake of argument the payment of scholarship to assessee’s son is treated as perquisite, it is not liable to be included in view of s. 10. The various receipts or items of the income enumerated in s. 10 presuppose that they are ‘income’. Otherwise there would have been no occasion for legislature to make a provision to exclude them from the total income of a person. Contention that the payment of scholarship was nothing but a perquisite to the assessee and as such it is liable to be included in the hands of assessee under s. 17 is misconceived and liable to be rejected for the reasons more than one. No question whether the payment of scholarship to an employee’s son by a company is a perquisite or not, has been referred by the Tribunal for the opinion of the Court. The amount of scholarship was received by the assessee’s son and not by the assessee. When the scholarship was paid entirely gratuitously by the company and in its sole discretion and payment of scholarship amount was never received by the employee but the children concerned, the scholarship amount cannot be treated as a perquisite received by the assessee as contemplated under s. 17(2)(iii)(c).”

Conclusion

Scholarship granted to employee’s son is exempt under s. 10(16) and is not taxable as a perquisite under s. 17(2)(iii)(c).

 

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Category Income Tax, Other Articles by - Deepak Agrawal 



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